Netflix Viewing Seen Swelling U.S. Cable Bills Next Year: Tech

Cable operators are rethinking their Internet pricing strategy because Netflix and Hulu’s subscription services have driven up usage at peak hours once reserved for watching TV. Photo: Jin Lee/Bloomberg

Nov. 30 (Bloomberg) -- Time Warner Cable Inc. and U.S. pay-TV companies, weighing how to profit from surging Internet
demand spurred by Netflix Inc. and Hulu, are on the verge of
instituting new fees on Web-access customers who use the most.

At least one major cable operator will institute so-called
usage-based billing next year, predicts Craig Moffett, an
analyst with Sanford C. Bernstein & Co. in New York. He said Cox
Communications Inc., Charter Communications Inc. or Time Warner
Cable may be first to charge Web-access customers for the amount
of data they consume, not just transmission speed.

“As more video shifts to the Web, the cable operators will
inevitably align their pricing models,” Moffett said in an
interview. “With the right usage-based pricing plan, they can
embrace the transition instead of resisting it.”

U.S. providers like Time Warner Cable have weighed usage-based plans for years as a way to squeeze more profit from Web
access, and to counter slowing growth and rising program costs
in the TV business. While customer complaints hampered earlier
attempts, pay-TV companies are testing usage caps and price
structures that point to the advent of permanent fees.

“We’re basically a broadband provider,” Peter Stern,
chief strategy officer for New York-based Time Warner Cable,
said Nov. 17 at the Future of Television conference in New York.
“As a convenience for our customers, we package and distribute
television and provide service around that.”

Google Deterrent

Rogers Communications Inc., the largest Canadian cable
company, has been billing broadband customers based on
consumption since 2008. U.S. providers AT&T Inc. and St. Louis-based Suddenlink Communications LLC are experimenting with
usage-based plans.

Cable companies see usage-based billing as a way to limit
the appeal of online services like Netflix and Hulu LLC, and
reduce the threat from new entrants like Amazon.com Inc. and
Google Inc.

“It’s the reason why Apple or Google would inevitably be
reticent about committing a significant amount of capital to an
online video model,” Moffett said. “You can’t simply assume
just because you can buy the content more cheaply, you can offer
a product that’s cheaper to the end user.”

Netflix and Hulu’s subscription services have driven up Web
usage at peak hours once reserved for watching TV. Google,
Amazon, Apple Inc. and premium channels HBO and Showtime have
also put shows online and followed viewers onto mobile devices
like iPads and Android tablets.

Web Demand

While demand for Web service grows, cable operators are
battling to preserve profit in the mature pay-TV business and
withstand competition from satellite carrier DirecTV, Verizon
Communications Inc.’s FiOS and AT&T’s U-Verse. Programmers like
Walt Disney Co.’s ESPN are also demanding higher fees.

Time Warner Cable, the second-largest U.S. cable operator
behind Comcast Corp., lost 126,000 pay-TV accounts in the third
quarter.

The incentives to focus on Web access are compelling.
Cable’s broadband gross margins are about 95 percent, versus 60
percent for video, according to Moffett. As programming costs
increase nearly 10 percent a year, video margins are crimped, he
said.

Time Warner Cable is testing meters to measure broadband
consumption for the purpose of tiered pricing, Chief Executive
Officer Glenn Britt said in June. In April, he said usage-based
billing is “inevitable.” A previous attempt in 2009 was
abandoned amid customer complaints.

Low-Impact Users

“Some form of usage-based billing might have some utility
for customers who use the Internet very little, or only use low-bandwidth applications like e-mail,” said Alex Dudley, a Time
Warner Cable spokesman.

AT&T, based in Dallas, charges digital subscriber line, or
DSL, customers who exceed a monthly limit of 150 gigabytes in
three consecutive months $10 extra for every additional 50
gigabytes of data they use.

Suddenlink, with about 1.4 million customers in states
including Missouri, Arizona, Texas and North Carolina, began
instituting usage caps in some markets in October. Users pay $10
for each 50 gigabytes they use over their monthly allowance.

Data usage is surging by almost 50 percent a year, Chief
Executive Officer Jerry Kent said in an interview. Suddenlink’s
broadband revenue rose 12 percent in the third quarter, versus a
1.6 percent gain from pay-TV.

Movie Quotas

Cox, the third-largest U.S. cable company, segments Web-access customers based on data speed, allowing those who
purchase faster service to use more data overall.

While those who exceed the caps aren’t charged, they are
told to reduce usage or choose a different plan, said Todd
Smith, a spokesman for Atlanta-based Cox. He wouldn’t say
whether Cox will start charging based on total data used.

Comcast, based in Philadelphia, and St. Louis-based
Charter, No. 4 in the U.S., have instituted caps large enough
that most customers aren’t affected. Neither charges overage
fees, nor do they have near-term plans to charge subscribers
based on consumption, according to Comcast spokeswoman Jennifer
Khoury and Charter’s Anita Lamont.

The standard cap for Comcast, Charter, Cox and Suddenlink
is 250 gigabytes per month. That’s enough for a household to
send or receive 12,000 one-page e-mails and watch 60 standard-definition movies with excess capacity for other tasks,
according to Suddenlink.

Netflix Protests

Netflix steers customers with enough bandwidth toward high-definition movies, which soak up about double the data. If the
average U.S. household, which watches more than five hours of
television a day, were to transfer all that viewing to an
online, high-definition source, their usage would total almost
10 gigabytes a day and break through the current caps.

Charging by Web usage, cable companies may discourage
customers from dropping traditional pay-TV service and slow the
growth of Netflix, Hulu and an expanding list of online
alternatives, Moffett said.

The possibility of usage-based pricing has brought protests
from Los Gatos, California-based Netflix and warnings from
Charlie Ergen, chairman of rival Dish Network Corp., which
operates the Blockbuster movie-rental business.

$20 Surcharge?

“That Netflix subscription of $7.99 could go to an extra
$20 a month for bit streaming,” Ergen said during Dish’s
conference call on Nov. 7, making a total monthly subscription
“the equivalent of $27.99.”

Consumption-based pricing is anti-competitive if the goal
of broadband providers is to boost revenue by diminishing the
value of rivals, wrote Netflix General Counsel David Hyman in a
July Wall Street Journal editorial.

The practice “is not in the consumer’s best interest as
consumers deserve unfettered access to a robust Internet at
reasonable rates,” said Steve Swasey, a Netflix spokesman.

Federal Communications Commission Chairman Julius
Genachowski publicly supported usage-based pricing in December,
a victory for cable companies concerned that usage-based billing
would run afoul of net neutrality rules prohibiting Internet
services from favoring one form of content for another.

While lower caps may slow the online shift, cable companies
won’t be able to stop it. According to media researcher SNL
Kagan, about 12.1 million U.S. households will receive TV shows
and movies from Internet services rather than a traditional pay
TV provider by 2015, up from 2.5 million homes at the end of
2010, SNL Kagan estimates.

Cable’s best option is to find ways to profit from the
online shift, said Moffett. If the companies were to lose all of
their video customers, the revenue decline would be more than
offset by a lower programming fees and set-top box spending, he
said.

“In the end, it will be the best thing that ever happened
to the cable industry,” Moffett said.